Forex FOREX PRO WEEKLY #2, GBP/USD June 17 - 21, 2019

Sive Morten

Special Consultant to the FPA
Messages
12,727
Fundamentals

Second report this week, I would like dedicate to GBP. Yesterday we've talked a lot about fundamental issues around US Dollar and how it could impact on EUR/USD rate in future. Well, with the same degree this is relates to gold market, as recent driving factors stand the same. Things that we've said last week stand the same - right now continuation of major upside trend is barely possible due weekly overbought and market needs to take a breath. As fundamental background starts to change - this should impact on gold market as well. So, on gold we still watch for moderate retracement, which, as we believe has started on Friday.

On GBP, in turn, we have separate, independent context, because it have additional domestic driving factors, mostly political - Brexit and elections. This makes GBP very attractive to trade as we have long-term bearish view on Cable. Last week, some important issues have happened, that refresh technical situation and open way for new trades there. Here is our last update on GBP, if somebody wants to recall what we've talked about month ago.

As Reuters reports - The British pound fell again on Friday as investors trimmed their positions after Brexiteer Boris Johnson moved closer to becoming the next prime minister, with sterling on track for its sixth week of losses versus the euro.

Sterling has fallen in recent weeks as the contest to succeed Prime Minister Theresa May heats up.

Investors are concerned that May’s successor will lead Britain out of the European Union with no deal in place on their future trading relations.

They are also worried about how little time whoever takes over will have to try to renegotiate May’s withdrawal agreement with Brussels. The EU says the deal is not up for renegotiation before Britain is scheduled to exit on Oct. 31.

Johnson, the face of the official Brexit campaign in the 2016 referendum, on Thursday won by far the largest number of votes in the first round of the Conservative party leadership contest. Betting markets give Johnson a 70% probability of winning.

The new prime minister should be chosen by the end of July. The seven remaining candidates to lead the Conservatives will be whittled down to two by lawmakers before a postal ballot of the wider party membership is held to select the new leader.

Still, some think sterling’s selloff has gone too far.

“Recent sterling weakness has been overdone, in our view, because markets are pricing in too high a risk of a no-deal Brexit in October,” UBS wealth management said in a note.

UBS said “lingering uncertainty” should keep the pound between 84 pence and 90 pence, with buying and selling opportunities when the currency nears the edges of that range.

It retained its three-, six- and 12-month euro/sterling forecasts at 87 pence per euro.

Nomura analyst Jordan Rochester said he is taking profits on a short position on the pound.

“It’s because all the negatives are known: GBP rallying on the smallest of non-events makes us wonder what would happen if we had some “positive” news. We would likely suffer from a position squeeze that for now we don’t want to be a part of,” he wrote.

At the same time, trading in the British pound has fallen sharply since March when Britain delayed its exit from the European Union, with turnover in May down almost a tenth versus a year earlier and activity in the futures market at its lowest since 2016.

Average daily turnover of sterling dropped to $249.5 billion in May, its lowest in 2019, data compiled by CLS, a major settler of trades in the $5.1 trillion-a-day foreign exchange market, showed.

Futures market activity has fallen as the political uncertainty stemming from the Brexit postponement to Oct. 31 and the contest to choose a new British prime minister encouraged investors to sit on the sidelines.

According to data from CME, one of the world’s biggest exchanges, average daily volumes of sterling/dollar futures contracts fell nearly 18% in May versus a year ago. April’s average daily total was the lowest since August 2016, shortly after Britain voted to leave the EU.

Price swings in the pound have also eased sharply since April.

One and three-month sterling/dollar implied volatility gauges - a measure of expected price swings - are close to their lowest since early 2018. More volatile price moves tend to correspond to bigger trading volumes.

“There was heightened Brexit uncertainty (in March). Now we know Britain will remain in the EU until the end of October so there’s not the same need to trade,” said Lee Hardman, a currencies analyst at MUFG. “We anticipate a pick-up (in volatility) the closer we get to October.”

The weakness in May sterling turnover - which covers cash, forward and swap markets - mirrors a drop in broader forex market activity, as reduced volatility discourages trading.

A major dovish shift by the world’s biggest central banks and difficulty in discerning who will lose out most should a U.S.-China trade war escalate have left FX traders uncertain as to where currency prices are headed, even as investor worries have raised volatility in stock and bond markets.

In the futures market, the drop in sterling activity has been more marked. May ranked as the quietest month since October 2018, although this follows a particularly busy March when traders prepared for Britain to leave the EU.

MUFG’s Hardman said that once a new prime minister is chosen to replace Theresa May, he or she will have a short window after the summer to try to renegotiate the Brexit withdrawal deal and break a deadlock in parliament before October.

That should spark more uncertainty about what form Britain’s departure will take, and even whether it will leave the EU at all, increasing volatility.

Here is also, guys, detailed article in Guardian, dedicated to election process in Conservative party, and here is more information on this subject. So, if you want to know more details - just read these articles.

So, maybe UBS and Nomura are not wrong too much with statement, that as new PM elections as coming Brexit process mostly are priced-in already. But this is only half of the story. Since we talk about GBP/USD, second half is US Dollar.

This story we've discussed yesterday. Actually, when the rally against the dollar has started across the board - gold, EUR etc. GBP was trying to take part and we even talked about reverse H&S pattern. But, it has shown very weak reaction while other currencies and gold have shown solid rally. This moment tells on strong bearish sentiment on GBP.

CFTC chart doesn't show something really terrible. Last week when markets were standing in rally, GBP has got some relief as speculative positions have diminished slightly, but it would be interesting what we will get next week, especially if our suggestion on USD strength will be confirmed:

upload_2019-6-16_14-22-43.png


So, as we can see - as on EUR as on GBP investors keep short positions, despite last week upside action. In fact, I would say that Friday drop on GBP has happened not because of B. Johnson victory but because of the same US Retail Sales data. This drop changes short-term technical picture on GBP and suggests long-term downside trend continuation.

Technicals
Monthly


July has started with downside action and long-term picture looks bearish, so we keep existed analysis valid.

On monthly chart trend has turned bearish, price has dropped below YPP, confirming long-term bearish sentiment. Bearish grabber that has been formed in the beginning of the year is still valid and suggests drop below 1.24 area.

On monthly chart we need to follow the sequence of the swing to understand where we're now. Action down to 1.21 was the CD leg of our major all-time pattern. Once COP extension has been hit, market turned to reasonable retracement and completed harmonic swing. We see that upside harmonic swing to 1.46 area is slower than downside drop.

Now market is going down again. It could mean that CD leg continues and in long-term perspective, OP target could be completed. But this is too long-term perspective for us. We need something closer to use it as real target in day-by-day trading.

Also I wouldn't talk on AB=CD upside action after major COP. COP is minor target and it is quite rare leads to deep retracement in shape of 2 legs.

Overall price action shape lets us to suggest appearing of butterfly pattern, with first target around 1.1335. Another target is YPS1 that stands at 1.2440.

gbp_m_17_06_19.png


Weekly

Weekly trend stands bearish as well, oversold level is around 1.22 area, which agrees with YPS1 on monthly chart.

Here we also have our major weekly target - COP around 1.2170 area, but, definitely this point is not of nearest perspective.

Most valuable moment for us here, guys, is a failure of reverse H&S pattern. You probably do not remember this, but we've talked on this subject in our report, dedicated to GBP in the beginning of the May. Here is what we've said:
"overall price action reminds reverse H&S pattern and what has happened with it? Right, it has failed to break the neckline. Besides, last upside effort mostly was erased by the drop. Weekly trend stands bearish. As we mentioned last week, to get official confirmation of H&S failure - we need price drop below shoulders - 1.2650-1.2750 area."

Last time we said, that breakout of shoulder's low has happened. Last week GBP has made an attempt to move higher an reanimate this H&S pattern, but unsuccessfully and H&S failure turns to final stage - collapse.

Iit means that price should drop below the head, which agrees with our extended target.
gbp_w_17_06_19.png


Daily

On daily chart market already has broken all major Fib levels. Attempt to show any meaningful reaction on OP target has failed. If you plot 3x3 DMA here, you'll see that DRPO "Buy" theoretically is possible, but taking in consideration overall context that we have as around GBP as around USD on coming week - I suppose no 2nd bottom of DRPO pattern will be formed and market just continues downside action. Next target here is XOP at 1.2340.

Besides, picture that we have on intraday chart also tells in favor of bearish continuation.
gbp_d_17_06_19.png


Intraday

On 4H chart market is crushing our reverse H&S setup, and this is strong signal. Here we have to pay attention to 1.618 butterfly as it destination point coincides with Yearly PS1 at 1.2440. MPS1 also stands near. This is our first target.
gbp_4h_17_06_19.png


On 1H chart we have good thrust down, so keep an eye, whether we will get B&B Sell here. It will be very useful for position taking. Any other bearish continuation pattern is welcome as well. Now it seems that 1.2640 area is good enough to consider short entry:
gbp_1h_17_06_19.png


Conclusion:
Analysis of fundamental factors this week confirms existing of bearish sentiment and we keep our long-term bearish view on GBP. As B. Johnson becomes most probable PM candidate, we think that he becomes the factor of increasing uncertainty as B. Johnson has recommended himself as very contradicted politician. He will have too few time to provide improved Brexit Agreement and we suspect that he is the choice of UK political forces who takes bet on hard way of Brexit. Thus, we treat his election as bearish sign for GBP.

In short-term perspective market give signals on downside continuation due external factors - strength of US Dollar. Initially we watch for 1.2640 area that looks suitable for short entry. Our nearest target is 1.2440 - range around Yearly Pivot Support 1.


The technical portion of Sive's analysis owes a great deal to Joe DiNapoli's methods, and uses a number of Joe's proprietary indicators. Please note that Sive's analysis is his own view of the market and is not endorsed by Joe DiNapoli or any related companies.
 

Sive Morten

Special Consultant to the FPA
Messages
12,727
Greetings everybody,

So, as our GBP scenario stands under way, let's take a look at Gold market again. The weekly overbought still stands as a major factor and we're watching for retracement down to get better entry level. Still, as we talk about weekly OB, on daily it should be something valuable, some clear bearish reversal pattern that trigger downside action.

Initially, we thought that it could be H&S but recent action makes us think that 3-Drive pattern is more probable here.

On daily price flirts around MACDP line which could give a bullish grabber as well:
gold_d_18_06_19.png


Here is the pattern that we consider right now. It shows perfect ratios combination, typical for 3-Drive.
gold_4h_18_06_19.png


Thus, on daily chart we wait for retracement and have no plans to trade Gold short. But if you trade on intraday charts, you could consider this pattern.

On 1H chart we have minor bearish "222" Sell setups. Now market stands at OP and 5/8 Fib level, next is XOP @1253. All of these levels will be traded, I suppose, by the market. But, we mostly suggest minor reactions, 3/8-1/2 retracement at OP and XOP, but not real reversal down. Mostly because of picture on 4H chart. Thus, setup on 1H chart is even shorter-term than on 4H chart.
gold_1h_18_06_19.png
 

Sive Morten

Special Consultant to the FPA
Messages
12,727
Greetings everybody,

Gold market keeps our scenario very well. As we've agreed yesterday - now we're watching for 3-Drive "Sell" pattern with potential reversal point at 1365 area. At the same time, on daily, we could bullish grabber.

As gold stands at weekly overbought, we suggest that upside potential right now is limited and gold needs some relief moderate retracement on daily chart. This is our trading plan.
gold_d_19_06_19.png


On 4H chart our major pattern stands. The 3rd drive could take the shape of butterfly, which is very typical for this pattern. Now we see multiple bullish grabbers as well:
gold_4h_19_06_19.png


On 1H chart, as we've suggested, as OP as XOP targets where traded, but none of them have led to major reversal.
gold_1h_19_06_19.png


Now we have few scenarios, what to do here. Daily traders should do nothing, just wait when 3-Drive will be completed and wait for retracement. Those who wants to Sell - should wait when 3-Drive will hit 1365 as well. This is better point to sell, at least it provides low risk and completed pattern.
On intraday chart, it seems it is possible to go long, based on either 3rd Drive butterfly or grabber directly with the same 1365 target.
 

Sive Morten

Special Consultant to the FPA
Messages
12,727
Greetings everybody,

It is not too much to talk on Gold market. Technical situation takes the backseat when Fed starts to speak and fundamental driving factor distorts common price action. Thus, despite that gold stands and daily and weekly OB - it was able to show rally yesterday due Fed statement. Thus, technical picture stands the same - we wait for retracement and in current situation we can't call to take long position, as you undertand. Besides, gold hits our daily COP target. Despite that we were ready for that, we thought that it should happen not as fast as it was.

gold_d_20_06_19.png


Despite that yesterday we were watching for upside continuation to 1365 area, to complete our 3-Drive pattern - gold rallied and totally erased this setup. Now, on 1H chart we have local XOP, but no patterns are formed yet here. Besides, it will be difficult to go short mentally, in current conditions as we already saw, what market does with bearish patterns. By the way, this is the reason why we do not recommend to trade gold short, despites possible setups. Mostly we need the retracement and better price for taking long position.

Still, if you're watching to go short - wait for clear bearish patterns. They could be formed on 1H chart, may be "222" Sell or some others. Long position is also possible, based on B&B "Buy" or "222" Buy, when minor pullback will happen, but profit taking should be right around the top.

gold_1h_20_06_19.png
 

Sive Morten

Special Consultant to the FPA
Messages
12,727
Greetings everybody,

Gold shows so fast upside action that daily time frame is not enough to get full vision. We need to take a look at monthly chart as well. Our weekly report picture shows that 1383 is major monthly all time 3/8 Fib resistance area. Yesterday it was totally washed out by market, all stops have been grabbed about it.

At the same time this is the neckline area of our compounded H&S pattern that we are watching since the beginning of the year. Also we know that gold is overbought at weekly and monthly chart and in fact, we have weekly bearish "Stretch" pattern. All this stuff doesn't change our trading plan because we already wait for pullback on gold market, but it brings some important background for retracement.
gold_d_21_06_19.png


On 4H chart gold also hits local OP target:
gold_4h_21_06_19.png

Unfortunately we can't use 2H and 8H time frames in MT4, but if we could we probably get huge bearish engulfing or evening star pattern right at top and monthly resistance. MACD divergence stands here as well:
gold_1h_21_06_19.png


That's being said, despite that signs of coming retracement become better - we have no intention to trade gold market short. Daily scenario stands the same - wait for pullback.
If you decide to trade it short - you need follow just one necessary condition - get clear bearish reversal pattern. It provides definite failure point and where to place stop. I would suggest that if retracement indeed is started, 1350 is first support that gold could reach.
 
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